One of the main attractions of real estate investment trusts (REITs) is their dividends. These income streams, which tend to be above average, provide investors with cash flow they can use to meet some of their expenses. If there's one drawback to these dividend payments, they're typically in quarterly installments, which doesn't align with an investor's monthly budgetary needs.
Because of that, REIT investors have to weigh their options if they want to generate recurring income to meet their expenses. They either need to budget accordingly, buy REITs with staggered payment schedules, or invest in a monthly dividend stock. Here's a look at some things to consider when investing in REITs that pay investors each month, as well as some top options to buy right now.
What are monthly dividend REITs?
Monthly dividend REITs are real estate companies that choose to distribute dividend income to their investors on the same monthly schedule as they collect rent from tenants. Because of that increased frequency, these monthly dividend payers are even more like being a landlord, though without all the associated headaches, making them ideal passive investments.
Potential pitfalls of monthly dividend REITs
While a more frequent dividend payment is an attractive feature for a REIT, it doesn't automatically mean it's a good investment. Thus, an income investor needs to weigh other factors, such as the sustainability of the dividend payment. Characteristics to consider:
- Whether it has a conservative dividend payout ratio: While REITs often pay more than 100% of their taxable net income, they should distribute less than 100% of their funds from operations (FFO), with 80% or less being an ideal number.
- The health of its balance sheet: REITs rely on debt to help them finance acquisitions and development projects. Because of that, they need ample financial flexibility to continue growing. Ideally, they'll have an investment-grade balance sheet backed by a leverage ratio of less than 6.0 times debt to EBITDA.
- Whether the REIT has a solid property portfolio and growth prospects: REIT investors also need to make sure a company can continue paying dividends. That means owning high-quality properties in growing markets.
A monthly dividend REIT lacking more than one of these characteristics is at higher risk for a dividend cut, which is why investors need to consider more than the frequency of a company's cash dividend.
For the past few months, I’ve written about monthly dividend REITs to buy, and while that’s a subset of maybe a dozen real estate stocks, there’s still some variety in there. So, instead of revisiting the best-known REITs here like STAG Industrial, SL Green, and the granddaddy of them all, Realty Income, I thought I’d branch out a bit and highlight three monthly dividend stocks that provide their own reasons for consideration for an October buy.
Agree Realty (NYSE: ADC) is a retail REIT that focuses on net lease arrangements with a diverse list of tenants in a portfolio of 1,262 owned and operated properties, with 26 million square feet of leasable space in 46 states across the U.S.
Suburban Detroit-based Agree began paying dividends monthly this year, first at $0.207 per share through March and then $0.217 per share through October. That was after steadily raising its quarterly dividend since 2013, even through the worst months of 2020.
Agree shares closed at $66.95 on Sept. 28, compared with a 52-week high of $75.95 reached on Aug. 1 and a 52-week low of $61.27 on March 4. That was good for a market cap of $4.6 billion and a yield of 3.87% based on an annual dividend of $2.60 per share.